TMFAleph1 (94.23)

The Bull 'n Bear on Moving to DEFCON 2

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Investors might be well served in moving to DEFCON 2 right now ('Further increase in force readiness, but less than maximum readiness.') I'm a long-term optimist, but it's very difficult to carry that optimism over to a short-term view of economic conditions and markets. I'm looking for positive signs to disprove a pretty bearish outlook, and they are very hard to find. Meanwhile, the evidence of adverse change are popping up with increasing regularity:

When one considers that housing prices and consumer spending are the twin pillars of GDP -- and that they are interrelated -- those developments are hardly encouraging. Speaking of of consumer confidence, the post-recession rebound in consumer spending in the U.K. is now projected to be the weakest on record since 1830. Now, the U.K. has chosen a path of austerity, so the example is not directly comparable to the U.S. economy, but it is becoming increasingly clear that the recovery in the U.S. is not following the historical script (i.e., it is weaker than normal -- the "new normal", as it were.)

Meanwhile, an article in the FT argues that the fate of the global economy and the Chinese property arket are increasingly intertwined. That is worrying, since there is evidence that real estate markets in China are in (or near) bubble conditions. I don't think there is a nationwide bubble in China, but the existence of bubbles in local markets is certainly plausible.

Part of this surge in urban real estate prices has been driven by the gargantuan increase in bank lending by Chinese banks that state authorities engineered in response to the global financial crisis. If you want to get an idea of the results of this type of action, I refer you to this article by Reuters, according to which that central state authorities in China are planning to transfer somewhere between $440 and $660 billion in local government liabilities of the localities' balance sheets. The reason? "The governments may default on around 2 trillion yuan ($440 billion) of loans, the Chinese media have reported."

Alex, here again we are in agreement. :) I never felt that the recent strength in equities was sustainable by any stretch of the imagination, and while I am very concerned for the economic fate of my fellow citizens, on some level I am relieved to see that momentum is waning before the canyon of disconnect between perception and reality was able to grow any deeper as a set-up to an even larger fall.

The recession never ended: it was absconded in liquidity. The crisis never abated, since no root cause was ameliorated. It seems the deleveraging monster has begun to stir once more, and as the lone tool remaining in the Fed's arsenal, so without a doubt additional quantitative easing will again be used, and again, and again. The strategy was bunk from the beginning, yet they will go on responding to the immense challenge before them in like manner. In a tug of war between chasing gdp growth and preserving the purchasing power of the U.S. dollar; guess what ... the dollar will lose out every time. Gold is going to $2,000 and well beyond.

But I too have been raising cash in recent days, rather aggressively. Gold and silver typically join in the fall when indiscriminate selling takes hold, and creatures of habit that we are, many will turn to bonds. That's when I will be pressing my core holdings in gold and silver, however, since dollar distress will subsequently force shelter-seekers away from bonds and into the monetary metals.

Anyway, I commend you for paying attention to the sobering stuff. Many self-proclaimed optimists do not.

I would still be bullish on our economy and stock market if it weren't for high gas prices. High gas prices are an instant tax on everyone that they are reminded of every week. Anytime gas prices go really high you have about a month or two of lag time before bad news starts spreading.

Buffalonate, I saw somewhere that I think Deutsche Bank did a study that found that for every 1 cent increase in gas prices, it destroys a billion to 1.4 billion in other consumer spending. So the recent spike has destroyed something on the order of 100 to 140 billion in what would otherwise have been non-energy consumer spending, or something like that, if they are correct. ouch.